The price of a stock can be moved up and down due to various reasons. Suppose the company performing well then the price of the stock goes up. If the company has lots of problems and it’s not performing well the price of the stock goes down. Similarly, there are external factors like the economic condition of the country also affect the stock price. Here we are going to learn 5 corporate actions that directly affect the price of the stock.
What are the corporate actions which affect the stock price?
- Dividend
- Bonus Issue
- Stock split
- Rights issue
- Buyback of shares
How do Dividends affect the stock price?
What is a dividend?
The dividend is a portion of the profit given by the company to the shareholders. The management and the board of directors decide how much amount should provide to the shareholders as dividends. It’s a small portion of the total profit. It’s not compulsory to give a dividend to shareholders, it completely depends on the management’s decision. People who are looking for long-term investment will definitely consider the Importance of dividends. You can find dividend-related information in the financial statements of the company. It’s mentioned as a dividend yield in the financial statement.
Dividend Dates
- Dividend declaration date
- Ex-dividend date
- Record date
- Dividend payment date
Dividend declaration date
The management decides the percentage of the amount that should provide as a dividend then they will officially announce that and it’s known as the dividend declaration date.
Ex-dividend date
When the company announces the dividend, the investor should hold the shares for a particular period. The people who all are holding the shares in that particular period are eligible for the dividend and this period is known as the Ex-dividend date. The share should buy at least 2 business days before the record date and the investor who holds the shares on the Ex-dividend date is eligible for dividend payments.
Record date
The record date will come 30 to 40 days after the dividend is declared. On this date, they will collect the shareholder’s list and if you are holding shares for this particular date you will be eligible for the dividend.
Dividend payment date
On this date, they will pay the dividend to your account. The amount will be credited to your account which is linked to the De-mat account. You will get information about the dividend payment from the company’s website or financial news channels like money control.
Dividends usually declare When the AGM (Annual general meeting) happens. Some companies will give interim dividends as well. It depends on the company’s performance. If the company have good reserve either they can give some portion as dividend or they can use that for the expansion of business.
There are two ways it will get affect the share price. If the company announce the dividend and the investor have huge expectations and the company cannot meet the investor’s expectation then the share price will go down
If the company provides dividends more than the investor’s expectation then the price of the shares will go up.
Bonus shares are generally given in a ratio of 1:1 or 3:1. Suppose for 1:1, it means that if you are holding 1 share you will get 1 more share as a bonus, for 3:1 if you are holding 1 share you will get 3 shares as bonus shares. If you are holding the shares on record date you will be eligible for the bonus shares. If they are giving the shares in 1:1 then the price of the stock will go in half but the face value of the stock will remain as same.
Example
Share price = 1000
After bonus shares issue (you receive bonus shares in a 1:1 ratio then you will get 1 more share) = 500* 2 = 1000
-
Company in profits
If the company running in profits for years then there will be a chance of giving bonus shares.
-
Increased reserves
If the company has good profits and good reserves then it will use reserves in 4 ways
- Dividends
- Expansion
- Bonus shares
- Buyback of shares
- History
The investor can check whether the company has given any dividend or they are retaining those amount for expansion this kind of information from the history will help the investor to know more about the company’s dividend policy
When a company issue bonus shares, the price of the share will be decreased to half. Then more people will start buying the shares which will increase the demand for the shares. Compared to the stock split face value of the stock does not go down in bonus issues and the raised share capital is due to the increase of shares deducted from the company’s reserve.
How does a Stock split affect the stock price?
What is a Stock split?
A stock split is a corporate action where the face of the share is divided further and the number of shares gets multiplied at the same time.
How Stock split works.
No of shares = 1000
Face value of each share = 5
Share price = 10
Suppose 5 for 1 split is done by the company then
The new face value = 5/5 = 1
No of shares = 1000*5 = 5000
New share price = 10/5 = 2
When a company issues a stock split, the price of the share will be decreased to half. Then more people will start buying the shares which will increase the demand for the shares.
When a company is running in profits and they have increased its reserves then the company can buy its shares from the public. When the shares in the market will reduce and EPS (earnings per share) will increase due to buyback. In this situation price of shares will go up
-
Tender
When the company plans to buy back shares you can raise a request to the company about your willingness to give up the share you hold. The company will buy at a premium
-
Open market offer
The company can buy shares from everyone in the open market
When a company announces a buyback of shares, the price of the share will go up because it will create a demand in the market. Then more people will start buying the shares.
How does Right Issue affect the stock price?
In this case, the company offers its existing shareholders to buy shares at a discounted rate. If the market price is 100 the company may ask you to buy the share price at 90
Why this Happen
The company doing this to raise the fund. This is the best and simplest way to raise funds.
When a company gives discounted shares the supply has increased in the market and the share price may go down
Conclusion
In this topic, we have learned the top 5 major corporate actions and how they impact the share market
Corporate actions which affect the stock price
- Dividend
- Bonus Issue
- Stock split
- Rights issue
- Buyback of shares
These all corporate actions have a significant role in the share price. If you are planning for long-term investment please look at the dividend yield area also. That may help to identify the dividend history of a company